Without ensuring safety net and adequate liquidity for desperate investors looking to exit, the platform can become a prey-ground for vultures
Market regulator SEBI has given an exit route to mutual fund investors in wound up schemes, but one that involves a great cost. It is only half a job done. The regulator and the fund-house, in this case Franklin Templeton Mutual Fund, have both come up short in their duties to protect the investors. Six open-ended schemes, with nearly Rs 26,000 crore of investor money, being wound up is not a regular thing in the Indian MF sector. It happened because some people didn’t actually do their job as well as they thought they did.
A mandated listing sounds liberating, but this is not a much-awaited IPO stock getting listed! Right now, the bets are not on the premium, but on the discount to NAV. The listing of such MF units is an exit for investors who have been kept in suspended animation for about a month now. What do you think will happen? People will try to exit and buyers will drive down the prices lower. That’s how capitalism works. Without ensuring a safety net and adequate liquidity for desperate investors looking to exit, the listing platform can become a prey-ground for vultures to feast upon their prey.
The two situations may not be entirely comparable, but there are uncanny similarities: investors in MF schemes being wound up like Franklin Templeton are stuck like migrants in a Covid-19 worst affected city. During a lockdown, migrants couldn’t move much, barring a portion that tried to walk. We all know what happened to them. Some on their own tried to hitch a ride in overcrowded vehicles, and we also know what happened to a few overloaded vehicles.
The government realised it, albeit with a delay, that orderly exit of migrants could be done if the government puts its machinery to use. Shramik trains, buses etc. have done a fab job so far in ferrying migrants out to their homes. State governments have learned to work together. As a result, lakhs of migrants are going back to their homes safely. This could have been done for Franklin investors too, but it hasn’t happened so far.
When Franklin Templeton suddenly announced a lock-down for investors in six yield-oriented managed credit strategy funds, investors were robbed off their exit. Instead of hand-holding the investors to an orderly exit, both the fund-house and the regulator seemed to have left the investors on their own (Aatmanirbhar?).
Till today, there is no timeline for an orderly exit to all stuck investors who trusted their money to Franklin Templeton. The official response is things are moving and money will be back. How much? When? No answers to these questions. FT hasn’t also taken a stand like HDFC AMC, which took Essel group’s exposures on its books and injected Rs 500 crore to repay investors. FT has hired Kotak Mahindra Bank as an independent advisor to monetize its less than liquid debt portfolios. The advisory fees will thankfully not be charged to fund investors, who are already going to pay some cost for the fund-house taking loans to repay some early investors who managed to redeem.
All investments are done with a goal. If you are unfortunately a Franklin Templeton investor in one of these six debt funds, you can’t access your own money. That goal may be due, but you can’t exit. In this backdrop, the listing of such MF units seems like a heavenly manna. The devil, however, is always in the detail.
Additional Read: Franklin appoints Kotak Mahindra Bank as advisor to assist monetising portfolios of 6 shuttered debt schemes
SEBI’s role in the entire Franklin MF fiasco has been of a relatively mute spectator. Barring one statement where it directed FT management to return money soon, it has been largely okay with how things are being run. The sudden lockdown of nearly Rs 26,000 crore. Check. Open-ended schemes becoming closed-ended schemes overnight. Check. No clear timeline of investor exit or money repayment. Check. No other fund-house is in a similar situation like FT. Check. No fines or penalty for FT. Check.
We are unable to celebrate the market regulator allowing the listing of mutual fund units of the schemes that are in the process of winding up. SEBI has said that while a scheme undergoes the various steps towards winding up, the scheme units can be listed and traded on the stock exchanges as a means to provide an exit to investors. Who is looking forward to trading debt MF units with side pockets?
In a country like India where there is no junk bond market, the SEBI wants listing of mutual fund units of the schemes that had no other way to save investor money but to wind up. Without ensuring adequate liquidity and safety net (so that investors are not forced to exit at extremely low prices), this is like leading the lambs to the wolves. The stock market is not a charitable organisation. Buyers and sellers are driven by one sole motivator: profit. So, it is in the interest of the buyer of MF units, being wound up and locked up for a month, to drive down prices. The seller loses big.
Debt funds are supposed to be safer than equity funds. But, the six debt funds in question are not. A month has passed. The clock is ticking. The desperate seller of such units is not in a position to bargain or wait. He or she is desperate for cash. He or she does not have time to wait. They may be wanting money to run the family after a job loss, pay salaries to employees, pay for medical emergencies or any other thing. At this moment, listing such MF units in a platform may seem good news, but it’s not. The worst of deals happen when someone is desperate for cash, and 9 out of 10 times such deals favour the buyer.
Additional Read: Franklin Templeton sends a mid-month progress update to investors of 6 shuttered debt funds; things are moving
Some believe that listing units of schemes being wound up is a facility. They argue that if someone wants to sell and get liquidity they might find a buyer. They say maybe a buyer will only buy at discount but at least it provides an option for a negotiated transaction. But open-ended mutual funds, especially debt funds, were never meant to be for negotiated transactions.
The listing of units of schemes being wound up only is an enabler. To put it in a sweet way, it is a limited good. The stock exchange platform merely gives a route for a seller if they miraculously get a buyer offline. The poor liquidity of closed-ended MF funds is already an indicator of how things look. Plus, the six FT funds have a lot of below AAA debt securities. With the country staring at a year of economic contraction, which means corporates will face tough times repaying their debt, one wonders how long will the credit quality of the already under-the-weather debt fund portfolios.
No financial advisor is advising customers to go for listing exit of stuck FT units. This is because the investor is likely to take unnecessarily steep losses.
Selling of MF portfolio units on a stock market platform is likely to be at stressed valuations. Plus, the exit prices will differ for investors. Investors who came in on the same day at the same NAV will probably have different exit prices. You can downplay this as a function of demand-supply but that breaks the mutual fund way of doing things.
The word ‘mutual fund’ seems ironic today. There is nothing ‘mutual’ about a system where investors face all the losses while the fund-house puts its arms in the air. There is nothing ‘mutual’ about a system where the regulator takes the locked up investors and directs them towards the deep blue sea, full of sharks, as an exit route.
Investors need a route for liquidity. They don’t need just a route. They need their money back. In a mutual fund scheme (except exchange traded funds), the exit is supposed to be given by the fund-house alone. Tweaking this definition for to be wound up schemes, without ensuring necessary safeguards, sets a bad precedent for investor experience.
Every desperate investor, who takes a sharp hair-cut and still exits because she/he needs the cash, will not be rooting for the fund industry again. Mutual funds sahi hai?
Additional Read: Franklin Templeton updates investors, focussed on returning ‘maximum possible value’ in ‘shortest possible time’
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